Shorting in Broad Daylight: Short Sales and Venue Choice

Abstract

Using a novel database on venue short sales and market design characteristics, we ask: Where do short sellers exploit their information advantage? Consistent with the prediction of Zhu (2014), we find that exchange short sales comprise a larger proportion of trading and are more informative about future prices than dark pool short sales, particularly when there is greater competition among short sellers to trade and in the presence of short-lived information. When examining market design characteristics, we find that dark pools offering volume weighted average price crossing attract more short sales while those offering block trading attract fewer short sales.

Keywords: Information, market design, trading, short sales, return predictability

JEL Classification: G1, G10